The Bernie Madoff of China: Innocent man executed ?

In Yangshi village in the south central Chinese province of Hunan, villagers debate the fate of their fallen hometown hero Zeng Chengjie.

Zeng has been likened by the media to Bernie Madoff. The farmer's-son-turned-entrepreneur was found guilty this summer of defrauding investors in a massive Ponzi scheme similar to the now-disgraced American businessman. However, Zeng's real estate scheme cost him his life.

"He's not the only one who raised money this way," one villager laments around the card table. "Why did he have to be executed?"

It's a question many have been asking across the country: Was Zeng a perpetrator or a pawn of a flawed money system that has become a threat to China and the world?

China's financial sector has long been controlled by the government. State-owned companies get cash whenever they want, while private companies are largely starved of capital. "[Private companies] don't get access to bank loans," said Fraser Howie, co-author of "Red Capitalism". "As small companies need financing, you have shadow banking developing. It's as simple as that."

In Zeng's case, he moved from his farming village to the city of Jishou, taking advantage of the construction craze there. He built 57 developments using money borrowed from the community-a common practice in China.

This is where the story gets murky. Zeng was executed-officially for raising money for his projects illegally. However, his supporters challenge that version of events, questioning the justice of the government's action and stirring debate about how Chinese authorities will handle shadow banking.

Despite repeated calls, local authorities and court officials could not be reached by CNBC.

One of his investors, a retired math teacher, lost his entire life savings of $77,000. Yet he defended Zeng. He declined to give his name for fear of reprisal by government authorities.

"Nobody thought he was a crook, " the investor said. "He was a decent person-not an unscrupulous businessman."

The investor says Zeng offered phenomenal rates-from 24 percent one year to an 80-percent annual return the year before Zeng was arrested in 2008.

"Over 90 percent of families were engaged in this shadow financing. You'd be a fool not to do it!" the investor said. "People here have almost no way to invest."

Those shockingly high returns didn't worry investors, he says, because this off-the-book lending was backed by the government.

"We saw many government officials invest," Zeng's investor said. "The government had a command office at Zeng's company."

But in 2008, new officials took over and, according to Zeng's family lawyer, ordered a crackdown on shadow finance.

"After the government pulled out, they told all these financing companies to stop paying the investors," lawyer Wang Shaogang said. "This, of course, infuriated the people."

Investors rioted and the police stormed in. Zeng was accused of defrauding investors out of half a billion dollars. He and other company bosses were jailed. His assets sold off. The case has sent shockwaves through the community of entrepreneurs in China who feel vulnerable to the shift in political winds.

"All the money was used on the company projects," Zeng argued in letters from prison. "There's very clear book keeping. I've never embezzled or transferred the money."

Wang admits that to pay out the high returns Zeng used incoming investor money while waiting for real estate investments to bear fruit. He insists Zeng intended on paying everyone back in full.

After five years in prison, Zeng was executed by firing squad in July. His family was not informed until he was dead. "It feels as though he's still alive because I never saw his body," said his 23-year-old daughter, Zeng Shan.

Zeng's daughter is now on a mission to clear her father's name. She has been blogging about the case, sparking public discussion about the competence of China's courts and rule of law.

Zeng's wife and other daughter are still in jail for their roles at his company. Shan said she has not told them about the execution out of concern for her mother's poor health.

In prison, Zeng expressed remorse for her suffering after his arrest.

"She's a great wife and mother," he wrote. "In the future, I will cherish her, care about her, protect her and make it up to her."

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